An extremist, not a fanatic

March 21, 2007

Brown weakens incentives

I've mentionedbefore the scandal of high effective tax rates upon the low paid. In today's Budget, Brown has done something about this - he's made them worse.There are two reasons for this - he's scrapped the 10p starting rate of tax, and he's raised the rate at which tax credits with withdrawn from 37% to 39%. For a few people, this means withdrawal rates will rise by 12 percentage points - though this is mitigated by a rise in the income you can get whilst getting a full working tax credit.This means incentives for people to work harder or get better jobs have fallen still further. It also means an even bigger proportion of rises in the minimum wage will be returned to the Treasury.It also reverses New Labour's 1997 manifesto promise:

Our long-term objective is a lower starting rate of income tax of ten pence in the pound.
Reducing the high marginal rates at the bottom end of the earning scale - often 70 or 80
per cent - is not only fair but desirable to encourage employment.

Comments

I think the WTC measures more than mitigate the abolition of the 10% rate for most workers - they'll actually see slightly lower tax rates. I think that "a few people" there needs the modifier "very very", as I suspect that the 12 percentage point increase will only apply at a couple of very narrow pinch points and that in general, withdrawal rates will have fallen. Hard to tell until we see the detailed figures though.

Dsquared - the 2% tax cut is wiped out by 2% increase in WTC withdrawal. What a complete and utter bastard. In any event, what difference does it make if marginal withdrawal rates of currently 70% to 95.5% come down by one or two percent? How about getting them down to the basic rate of tax?

[In any event, what difference does it make if marginal withdrawal rates of currently 70% to 95.5% come down by one or two percent? ]

I really think that everyone on this blog is much too hung up on marginal rates, and particularly the high marginal rates created at benefit pinch points, which really aren't all that representative. Average tax rates matter too, and the average tax rate on (previous) 10% tax payers looks to me like it has come down because of the expansion of the value of the WTC overall.

This is the whole problem of means tested benefits and we do ourselves a disservice if we think that there are silver bullet solutions (like the CBI which I know you favour). The only way that you would get the withdrawal rates down to the basic rate of tax would be either through having a very high overall income tax burden, or by reducing the overall level of benefits substantially. If we abolished WTC and housing benefit tomorrow, the marginal withdrawal rate would fall substantially, but I doubt any of the people who saw this "cut" would thank you for it.

I agree with D^2 on this. Reducing the withdrawal rate to the basic rate of tax will cost a large amount of money - unless you want to make some of the existing WTC recipients worse off. Now, maybe that's what some on the Right want, but they should be honest about it.

This is a sub-set of the CBI debate; where i said earlier that £100pw in CBI would cost more than the current system _and_ people with children and high housing costs would lose out. Even a single unemployed person renting a room in London probably gets more than £100pw (if you add JSA and the housing benefit recieved together). Now, perhaps CBI supporters do want to make such a person worse off and, in which case, they should honestly say that is what they want.

It depends what you're more worried about. If your no. 1 priority is "make it so that the poorest people have more cash" then means-tested benefits are the quickest solution.

The consequence of that choice, which you must accept, is that there is then no incentive for the recipients of these benefits to do any more work, because they won't get any more money.

If your aim is to create (or perpetuate) a class of disempowered serfs, what better way to do it than make their income independent of their actions?

By contrast, if you want to have a system where your low-income family can do something to improve their lot, it is absolutely crucial to have a sensible marginal tax rate [it's hard to take big steps, but easy to take little steps. If you take a little step, and see actual benefits, you're rather more likely to take another little step.]

The price that you have to pay for this is that you will have to reduce the benefits at the bottom end.

Of course, a CBI will also provide a strong economic incentive for London's unemployed to get on a bus and go and live somewhere cheap. That might not be a bad thing - it would reduce the pressure at the low end of the London housing market (so key workers are more likely to be able to afford to live there) and would provide a flow of people with a little available money back towards the current cheap areas, which must create extra economic activity there.

Sam, thanks for your response. I can see - as you outline - the difficulties in a system where (to a great degree) low-income earners with families have incomes that are not really dependent on their earned income but on the WTC. But, because I don't want to make them worse off [assuming their wages stay the same] I would _not_ cut benefits. That is what you advocate in your 6th paragraph and I think we'll have to agree to disagree on that.

Regarding getting people to move out of London, I can see the advantages of a system that encourages that. However, I am not sure if the unemployed moving out of London would necessarily have enough purchasing power to kick-start local economies in the poorer parts of the UK. Additionally, I am not sure how many people would move - especially if they have friends/family in London already [I suspect, due to the low level of unemployment benefits, many reciepients are actually getting some help from their friends/families and so wouldn't want to move away from them].

this is a theoretical statement not actually borne out all that much by the empirical evidence. Anyone making these arguments surely has to recognise that the UK benefits system has not, in fact, created a massive underclass of lazy serfs and that employment has been rising, not falling, for the last ten years.